This Frost & Sullivan insight presents an analysis of the current state of the U.S. mobile advertising market. Specifically, it comments on the emerging trend of programmatic mobile ad buying and ad serving in the United States, and presents details of the leading U.S. mobile operators’ advertising initiatives.

U . S . M o b i l e A d v e r t i s i n g M a r k e t

Introduction and Overview

This Frost & Sullivan insight presents an analysis of the current state of the U.S. mobile advertising market. Specifically, it comments on the emerging trend of programmatic mobile ad buying and ad serving in the United States, and presents details of the leading U.S. mobile operators' advertising initiatives.

Mobile advertising is the process of describing or presenting a product, a service, an idea, or an organization through mobile communication channels to induce mobile subscribers to buy, interact, or support the item being advertised. Following are the main channels of mobile advertising:

Advertising in these mobile channels could be served by ad networks, ad exchanges, ad mediators, or publishers (with the help of white-label mobile advertising platforms).

M o b i l e A d v e r t i s i n g M o d e l s

Existing and Emerging Models for Mobile Advertising

Penetration of next-generation smartphones and connected tablets continues to increase at a rapid pace in the United States. Frost & Sullivan expects the total number of smartphones in use to exceed million by 2017 in the United States, while the number of tablet users is expected to approach million by 2017. Virtually every connected display device— including smartphones, tablets, e-Readers, portable gaming consoles, and in-car entertainment systems—is used regularly for a wide range of content and multimedia services. This "screen fragmentation" has important implications for digital advertisers who want to show the right ad to the right audience in the right context, and on the right screen. In most cases, advertisers want to leverage targeting and content presentation capabilities of each medium to enhance the ad experience and maximize the desired campaign results for a particular audience.

The U.S. mobile advertising industry has changed dramatically in the last five years. Advertisers are spending more than dollars (on average) per smartphone user per year in the United States, which helps support the growth of this industry. At the same time, it is more important than ever for advertisers and agencies to measure the performance of their ad spends in order to justify this spending. While the mobile channel offers several unique ways to deliver effective and relevant advertising, the following challenges continue to restrict market growth: 1) device, and operating system (OS) fragmentation; 2) lack of detailed user targeting,; 3) limited screen real estate; 4) multiplicity of advertising platforms; 5) a complex mobile advertising value chain; 5) falling ad rates; and 6) a virtual glut of ad inventory.

Programmatic Mobile Advertising

Looking at entire spectrum of mobile advertising, there are three main business models for inventory monetization. There is the Direct Sales model, where the publishers have direct sale teams and sell to advertisers directly. Then there is the Network business model which has ad networks such as Millennial Media and Jumptap (though they may also have other products as well) selling directly. Then there is the Programmatic Market, defined as mediation and Real time Bidding (RTB) which is really going forward as RTB dominated space. With advertisers and agencies (collectively referred to as the "buy side") demanding more out of their mobile campaigns, the programmatic model continues to see good traction in the United States. The programmatic model is based on establishing a dynamic, real-time bidding environment in which the buy side and the "sell side" (content owners and content publishers) establish the value of ad inventory based on parameters such as placement of the ad inventory, user demographics, location, time of day, and even the type of device in real time. In an exchange-based programmatic environment, the buy side allows real-time bidding for inventory by several potential buyers, which allows the buy side to sell inventory to the highest bidder (thus allowing for revenue maximization from mobile ads). According to Mobclix, a Velti company, "Ad exchanges are online marketplaces for buying and selling advertising impressions. Developers maximize their revenues by auctioning their inventory to a combination of advertisers, ad networks, and agencies. Advertisers maximize their click-throughs by bidding on precisely targeted audience segments."

Private vs. Public Exchanges

Private and public mobile ad exchanges are the two important forms of mobile exchanges. Private exchanges—as the name indicates—allow publishers to 1) specify who is able to see and bid on their inventory; and 2) exert greater control (such as pricing floors) over the types of ads that could be served on their digital properties. These exchanges are also "transparent," meaning that advertisers specify exactly where their ads should run. They can also see full details of where they did run following a campaign. Demand for such exchanges is led by leading publishers who want greater efficiency, quality, scale, and overall control over the advertising experience delivered to their customers. More recently, private exchanges are also being considered by organizations that want to connect directly with advertisers in order to control the advertising workflow (and to generate higher margins).

A public ad exchange, on the other hand, is more "open" and can be used by a large(r) number of buy side participants to place bids on the available inventory in order to place ads. In an ideal scenario, both public and private ad exchanges should run in conjunction, with publishers leveraging private ad exchanges for specific types of inventory and then, using public ad exchanges to monetize any remnant or unsold inventory. Leading industry participants— such as Google, Millennial Media, Jumptap, Inc., Medialets, Nexage, Inc., and Mobclix (a Velti company)—are involved in the programmatic side of things and are rapidly enhancing their capabilities to provide for increased scale, and compatibility with the established online demand side platforms (DSPs). The challenge in such scenarios is to ensure a consistent way to allow the buy side to reach the desired audience across different devices. With users increasingly beginning a task on one device (such as a laptop) and completing it on another (such as a smartphone), it has become extremely important to be able to follow a user across different connected environments. There are various approaches that are currently being used to address this challenge, including leveraging various probabilistic mechanisms and leveraging massive sets of online and offline audience data to determine audience characteristics.

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